For as long as there has been healthcare we have struggled with developing economic models for its delivery. The variety of models that exist across the world – from the raw market seen in many developing countries; through various degrees of private / state sponsored insurance; to the pure state funded provision we enjoy in the NHS – attest to the fact that there is no ‘right answer’ to this conundrum.

The Funding Paradox of Healthcare

Most healthcare systems in one way or another attempt to resolve the inevitable paradox that in the majority of cases those in most need of healthcare are also the least likely to be able to pay for it. As a result most systems are a manifestation of a ‘collective bond’ between society and the individual – ‘We’ will pay for your healthcare when you need it as long as ‘you’ contribute what you can when you don’t.

Different systems manifest the bond in different way – Through direct taxation, private or state subsidised insurance. Even the least developed systems, that rely on direct payments for care have a degree of economic re-distribution built into them, with wealthier clients overpaying to subsidise the poor and charitable donations making up the difference.

Does the funding mechanism affect the amount of money the ‘collective’ is prepared to spend on healthcare? Interestingly it appears not to be the case – the biggest determinant on how much is spent is the wealth of nation, but the relationship is geometric one i.e. the wealthier a nation the greater the proportion of GDP is spent on healthcare. The graph looks like this:

Justice and Equity

Where systems do differ significantly is ‘in what way’ and ‘on whom’ the money is spent. The lesson from international healthcare system comparisons is that, in general, the greater the involvement of the state the better are the measures of ‘Universality’ i.e. distributive justice and equality of access.

Universality is not the only outcome we want to achieve from our healthcare funding system though – there is no point in having universal access to a system that is no good. Universality is ultimately, like funding model, a policy decision. It is a decision by the collective on how it would like to distribute the healthcare funds it has decided it can afford – both are the product of culture, politics, history and national character. But neither universality nor funding model alone determine health outcomes. Changing either of these is unlikely to improve the quality of care or the cost of its provision.

Is the NHS Any Good?

So, the NHS is funded to the level we would expect for the size and wealth of the nation – it scores pretty well (one of the best) on universality, although we lose points because we do tend to ration care by putting people into queues (but that is part of our national character). How do we know if we are getting the healthcare we are paying for? How do we know if the NHS is Good Value? To answer this question we have to understand the notion of value in healthcare.

Value is a fundamental function of any free market economy – it is an equation all of us reconcile, either consciously or unconsciously, every time we part with money for goods or services. We all make a calculation as to whether a particular good or service is ‘worth’ the amount of money we are about to part with. The solution to the value equation is always a very personal one – it varies enormously between individuals and even within the same individual at different times and in different contexts (most of us are prepared to pay more for a glass of wine to accompany a meal in a restaurant than we are for one when watching TV at home). Value drives market economics – it drives quality up and costs down – it improves quality of life and increases wealth – it is the triumph of market capitalism. But – it only works as long as the reconciliation of value (Worth/Cost) takes place within the same individual or entity. You cannot reconcile value if you are spending someone else’s money.

Let me tell a story to illustrate the point…

A Bitter-Sweet Motoring Tale

Just over two years ago I finally got around to replacing our family car after 8 years of neglecting the task. Having not thought about it in all that time I was for a period gripped by a frenzied interest in the family car market. After browsing the internet, buying the magazines, and even stepping into a car show room for the odd test drive – I ultimately had to come to a decision between 3 car types (having already decided that I wanted a medium sized family estate). These types are essentially ‘Low-End’ (cheap and cheerful e.g. Citroen, Seat, Fiat), ‘Mid-Range’ (Popular Reliable e.g. Ford, VW, Skoda) and ‘High-End’ (Designer, Classy, Expensive e.g. BMW, Audi, Lexus). In terms of cost low-end were in the range £12K – £15K, mid-range approximately £5K more than that and high-end another £10K on top of that and in excess of twice the cost of low-end. Having previously experienced the catastrophic residual value loss associated with the low-end of the market and been persuaded (conscience and wife in equal measure) that I couldn’t afford to go down the high-end route I settled (like many do) for a mid-range model and became the proud owner of a Skoda Octavia Estate. My personal ‘value journey’ has resulted in a car I am delighted with at no more cost than I was prepared to spend, and I am pleased to say the residual seems to be holding up nicely! My delight has only been tempered by the extraordinary hike in the cost of insuring it compared to the old car…

I was, unfortunately, involved in a car accident not so long ago – no one injured thankfully – but the car was off the road for several weeks. My positive motoring experience continued though – the insurance company appeared eager to help me out, arranging immediate retrieval of the vehicle, replacement with a hire car personally delivered to my front door, insistence that I put forward any personal injury claim (there was none). My car was returned to me weeks later in an immaculate condition having undergone repairs approaching half the cost of the original purchase price. The whole ‘accident experience’ was really no inconvenience to me at all, and I am told that the quality of repairs these days means that it will have no impact on residual value either. All great – but at what cost?

The car insurance market in recent years has undergone phenomenal price inflation – at times exceeding background inflation by a factor of ten. The introduction of ‘claims management companies’ ‘Personal injuries claim farmers’ ‘Professional body shop repairers’ ‘Replacement car hire’ etc. – have inflated the cost of motoring accidents massively. Everyone involved in the car accident ‘value chain’ appears to to be exceptionally eager to please and also appear to be profiting handsomely – in fact the whole trade was recently investigated by the OFT for profiteering. How has this runaway inflation been allowed to happen? It is a consequence of the fact that the value equation has become ‘de-coupled’ – whilst benefit is experienced by the individual the cost is shared out amongst the pool of the insured. I have contributed a small amount to overall inflation in the cost of insuring cars against accidents – had I been paying directly for the consequences of my accident would I have chosen such a high cost route to resolution? The fact is the system is locked into an inevitable inflationary spiral as no-one is controlling costs.

The market in new cars is a healthy market – it has delivered incredible improvements in the quality of cars over many years and at the same time kept costs down – the value equation is always resolved by the purchaser. The car insurance market is broken – delivering runaway inflation and ever diminishing value.

Delivering Value in Health

I am sure you will have realised that I believe that healthcare ‘markets’ share more in common with car insurance than they do with car manufacturing. That is why marketisation of healthcare has failed to deliver value.

The value equation in healthcare is on the face of it simple but is nuanced and complex – it looks like this:

VALUE = (Quality + Outcome) / True Cost of Delivery

The equation is reconciled rather uneasily within the ‘triumvirate’ of Patient, Provider and Payer. The providers are profiting (in this context by profiting I mean existing) from being fragmented, with no incentive to prevent costs being passed along the ‘value chain’, and plenty of incentive to do more at more cost to the payers. The patient experiences the quality and the outcome (often at some significant distance in time from the transaction) but has no notion of the cost. The payers are faced with irreconcilable demands for increasing scope and quality, limited levers of control of costs and under-developed measures of quality and outcome. All of this fuelled by the easy altruism of the providers spending someone else’s money.

Marketising Integrated Care

How can we yield the incredible power of a well functioning market to deliver increasing quality at reducing cost but not at the same time create a runaway self inflating market? Where in the system can we bring together the quality and outcome (as experienced by the patient) with the true cost of delivery (as experienced by the payer) in order to create value?

The answer, ironically enough, is coming from the US healthcare system. This has experienced the kind of runaway inflation described above and led it to becoming the most expensive healthcare system that has ever existed delivering aggregated health outcomes little better than systems costing less than a quarter per head of population. Yet the payers (in this case private insurers) have spotted the flaws in the market – the fundamentally self inflating structures of healthcare that incentivise primary care to refer, secondary care to receive and over diagnose problems for which they profit from treating. Their solution has been for the payers to move into the provider space – creating integrated healthcare systems. In doing so they have incentivised ‘doing less earlier for a better outcome’ – incentivised prevention, incentivised early accurate diagnosis, incentivised the creation of ‘activated patients’ and incentivised best value treatment. ‘Payer-Provider’ healthcare systems in the US such as Kaiser Permanente, Veterans Affairs and others are profiting from integrated care. They are deconstructing traditional silos and re-building delivery systems organised around whole value-chains – delivering end-to-end care for dramatically less cost. The market is moving from a market of healthcare providers to a market in integrated care organisations – providing whole life cycle care.

Time for a New NHS?

We want a better value NHS – one that delivers more and higher quality care for the same or less cost. This is a reasonable objective. We won’t achieve it by meddling with funding model or universality – these are predetermined and would require a re-negotiation of the collective bond, and would not deliver better value. We won’t achieve it by fragmenting the provider market – that will create a runaway self inflating system of passing the cost up the value chain. We might achieve it by integrating providers around whole cycles of care. We have been talking about integration in various guises for years but have delivered little as we remain in a purchaser provider split and a primary secondary split all locked in self preserving stalemate. What has been missing is the incentive to integrate and that comes from integrating payers and providers. This is for the NHS the slightly awkward lesson coming to us from over the Atlantic.

3 Comments

I really enjoyed reading this excellent essay. The NHS is in an uncomfortable place indeed. I agree with you that a win-win-win outcome is what we all want. The prize feels possible yet strangely elusive. As you know my hypothesis is that we never learned how to create a win-win-win design. Doctors and managers are experienced and capable burnt-toast-scrapers. We doctors wait for people to become sick before we act; we managers wait for systems to fail before we act. The knowledge gap appears to be accidental rather than deliberate – and if that is the case then filling it is necessary (though perhaps not sufficient). And there we hit a snag. There are no training books or college courses on healthcare system design. And no trainers,

Dear Roger,
Thank you for the insightful piece. As with all conversations about “value”, the question of how this is defined is particularly difficult in healthcare because “patient outcomes” are what we need to evaluate this, and that can, by definition, only works at the scale of a patient population, not an individual patient. In future pieces I would be curious to hear your take on “friends and family” tests.

Your mentioning of cost and how much patients would pay for something reminded me of a paper from 5 years back where patients in Turkey and Germany were asked how much they would pay to avoid post-operative nausea and vomiting. A subject much closer to our field. The abstract is worth a read: Acta Anaesthesiol Scand. 2007 Jan;51(1):38-43. Patients’ willingness to pay for anti-emetic treatment.http://www.ncbi.nlm.nih.gov/pubmed/17229228
Using currency to generate subjective scores is a clever adaptation of Likert scales.

And finally, as well as travelling across the Atlantic Ocean, I would also recommend travelling across the Irish Sea. In Northern Ireland, health and social care have been integrated unlike in the 3 other British countries for years.

Hello Dr Steadman
This article is a thought provoking.I liked the comparison of car insurance inflation to US hathcare premiums. This blog helps to view the existing heathcare systems from a very different perspective.
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